Leasehold property is generally less expensive than fee simple property and can look very attractive to buyers. There are extra costs associated with leasehold property and that is “lease rent”. Leasehold property means you have the right to use the land only for a certain amount of time years (1-99 years). During that time you pay lease rent to the owner of the land.
You can think of this similar to a 6 month or 1 year rental extended for x amount of years. It can be viewed as a secured rental unit for however long your lease is. During the course of the lease the lease rent will be “renegotiated”. This usually happens every 10 years (depending on how the lease is written). This renegotiation can be thought of in the same way as your monthly rent going up periodically due to inflation, costs, etc. The way the lease rent is renegotiated is written into the leasehold documents. Lease rent is calculated off of the value of the land at the time of the renegotiation. Land in Hawaii generally appreciates over time so the lease rent tends to always go up.
Leasehold property is not recommended for most buyers as the lease rent could go up substantially (double or triple) several times over the course of ownership. If buyers do not plan for these increases in advance they may have more monthly expenses than they planned for.
At the end of the lease term there are several things that could happen depending on what the fee owner wants to do. The best situation would be if the fee owner offers the fee to the leasehold owner. The leasehold owner can now purchase the fee and own a fee simple property. They could re-negotiate and extend the lease with the leasehold owner for x number of years. The last option is the fee owner could take back the entire property and you would be left with nothing. The last is the worst-case scenario. This happens sometimes when one owner owns the fee for the land and decides to turn the entire building into something else such as turning an apartment building into a hotel.
Leasehold property may be right for the right buyer. Retired buyers that are looking for less cost than a fee simple property and are okay with the length of the lease might be a perfect fit. Investors that can get a good return on the property, taking into account the lease rent, renegotiation, and length of the lease might be another great fit.
If you have any specific questions about leasehold property please feel free to contact me at (808) 351-8394 or Josephc@BetterHawaii.com